The introduction of lengthy tax packages is becoming an annual
event in Washington, DC, and 1998 is no exception. This year,
lawmakers passed the IRS Restructuring and Reform Act of 1998,
which makes some long-overdue improvements in IRS policies and
procedures and adds a host of other changes to an already bulging
tax code.

The IRS-overhaul portion of the act stems from the work of a
special congressional commission that studied the agency's need
to restructure and from Senate Committee on Finance hearings held
last fall that publicized numerous abuses taxpayers suffered under
the strong arm of the IRS.

But there's more to the new law than IRS reforms. CCH Inc.,
a provider of legal, tax and business information in Riverwoods,
Illinois, points out that the new statute contains 144 main act
sections, more than 40 taxpayer-rights provisions, and more than 70
provisions that make what lawmakers call "technical
corrections" to the existing tax code.

One change that's potentially lucrative for investors
concerns the shortening of the capital gains holding period. Small
businesses also benefit from a change dealing with the rollover
treatment for gains on small-business stock. The new law also makes
changes in the existing estate and gift tax law and alters some of
the rules on Roth IRAs.

Joan Szabo is a writer in Great Falls, Virginia, who has
reported on tax issues for more than 12 years.

Shaking Up The Service

One of the most controversial provisions in the new law has to
do with the burden of proof. Previously, taxpayers bore the burden
of proof when challenged by the IRS. Under the new law, the burden
of proof is shifted away from individuals and corporations (with
net worths of less than $7 million) under certain
circumstances.

"In [standard] audit situations, there isn't a
change," says enrolled agent Jan Zobel, owner of a tax
preparation and consulting business in Oakland, California.
Instead, the shift in the burden of proof relates only to tax court
cases. Such a small proportion of taxpayers go to the tax court
level that the change won't make much of an impact, Zobel
says.

Nevertheless, the new law provides business owners and other
taxpayers with some significant new rights. For example, the IRS
now has 18 months to notify taxpayers that they owe money. If it
doesn't notify the taxpayer in that time, penalties and
interest are suspended until notification occurs.

The statute also contains a provision that extends the existing
attorney-client privilege of confidentiality to CPAs and enrolled
agents. As a result, taxpayers concerned about maintaining
confidentiality now have a greater choice about who represents them
on tax matters, says Marvin Michelman, a director of IRS practice
and procedure with Deloitte & Touche LLP.

Congress also reined in the tax agency on the issue of property
seizure. Under the new law, the IRS must exhaust all other payment
options before seizing a taxpayer's business assets or
principal residence. The agency also can no longer seize nonrental
real estate that is used as a residence for satisfying an unpaid
liability of $5,000 or less.

Internal Rearranging

One of the most important changes affecting the tax agency
itself is the creation of a nine-member oversight board that will
have a strong say in strategic IRS planning, modernization,
training and collections procedures. It will be made up of six
private-sector experts (appointed by the president with Senate
approval), the Secretary of the Treasury, the IRS commissioner and
an IRS employees' representative.

Another significant provision is the creation of a new
organizational structure that calls for operating units within the
IRS to serve specific groups of taxpayers, such as individuals,
small businesses, large businesses and tax-exempt
organizations.

The new law also establishes a system of local taxpayer
advocates who report to a national taxpayer advocate and are
independent from the IRS examination, collection and appeals
divisions.

To increase electronic filing by taxpayers, the new tax law
first requires the Secretary of the Treasury to develop a plan to
make it easier for taxpayers currently preparing their returns
using tax preparation software to file electronically. Even though
these taxpayers use software to prepare their returns, many print
and mail them to the IRS. If taxpayers already have their filing
information on their computers, sending the return electronically
makes it easier for everyone, says Michelman. The aim is to have
those returns filed electronically by 2002.

Knowing When To Fold 'Em

The new law also gives investors a break by allowing them to get
a faster payback on their investments. Last year, Congress lowered
the rate on capital gains from 28 to 20 percent, as long as
investors held assets 18 months (vs. the previous 12-month holding
period). In addition, the 1997 law created a new category of gains
called "midterm gains," which applied to assets held more
than 12 months but fewer than 18. These were subject to the old
capital gains rate of 28 percent.

This year, Congress eliminated the midterm gains category and
the 18-month holding period. As a result, investors are only
required to hold investments for 12 months and a day to receive the
lower 20 percent capital gains rate. This is effective for gains
realized after December 31, 1997.

Lawmakers also took steps to further enhance an existing capital
gains provision designed to benefit small emerging companies in
need of capital. By law, people who invest in certain
small-business stocks receive a 50 percent exclusion on gains from
that stock if it's held for at least five years. The company
issuing the stock must be a "qualified small business"
with assets of less than $50 million.

Under last year's law, individuals who invested in
qualifying small businesses could avoid paying taxes on their
capital gains as long as they rolled over the proceeds from the
sale of a company's stock into the stock of another qualified
small business. In addition, under that change, it was still
possible to qualify for the 50 percent exclusion that was allowed
after the first five years of holding the stock.

In 1998, Congress extended the tax-free rollover treatment for
gains on small-business stock to stock held by partnerships and S
corporations. This change essentially allows investment pools to be
set up to make it easier for people to invest in emerging
businesses, says Thomas P. Ochsenschlager, a tax partner in the
Washington, DC, office of accounting firm Grant Thornton LLP. The
stock doesn't have to be publicly traded, but it must be in a
company organized as a standard corporation.

In the estate tax area, Congress made some changes affecting
family businesses. Under the 1997 law, executors for
family-business owners who died after December 31, 1997, were able
to elect special estate tax treatment for family-owned business
interests if those interests made up more than 50 percent of the
estate; other requirements also had to be met.

The 1997 act created an exclusion from the family-business
owner's taxable estate for the first $675,000 of value in
qualified family-owned business interests. This year's law
converts that exclusion to a deduction and stipulates that the
deduction can apply only for estate tax purposes.

For Roth IRAs, the new act gives high-income elderly taxpayers
who were previously ineligible to make a rollover from a
traditional IRA to a Roth IRA more leeway in converting to a Roth
IRA starting in 2005. Under the new law, for example, if required
annual withdrawals from a couple's IRA push their yearly income
to more than $100,000, the couple can still convert a traditional
IRA into a Roth IRA. Roth IRAs allow tax-free withdrawals, but
contributions to these accounts are not tax-deductible.

Because lawmakers anticipate the change will encourage Roth
conversions, they expect $8 billion in revenue to be raised over
the next 10 years as a result. Another revenue raiser picks up $4.1
billion over the next 10 years by generally prohibiting employers
from claiming deductions for vacation or severance pay that would
be granted to employees in a tax year other than the one in which
the vacation or pay was earned.

While far from straightforward and simple, the new law rights
some IRS wrongs and provides new tax benefits to taxpayers,
investors and business owners. With election-year fever already
mounting, Capitol Hill observers wonder what the next round of tax
changes will bring. Stay tuned.

Next Step

For more information on the new tax law, you can order 1998 Tax
Legislation Highlights, an easy-to-read 32-page booklet, for $7
plus shipping and handling. To order, call CCH Inc. at
(800) 248-3248.